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Thursday, August 25, 2005

Verbal FalloutI'm watching with keen interest to see if Pat Robertson's idiotic call for the assassination of Venezuelan President Hugo Chavez--apology notwithstanding--will result in more than a diplomatic tussle. There's a long tradition of American private citizens making the State Department's job more difficult, but the timing of this incident could not have been worse for energy markets that are already stretched to the limit.

I haven't changed my long-term assessment of the political risk of investments in Venezuela, and the recent Yukos-style back-tax assessment on Chevron serves to reinforce this view. Although the move predated the Rev. Robertson's remarks, I doubt that Chevron's lawyers found his comments at all helpful, as they prepare to defend their contract with the Venezuelan government.

Mr. Chavez's behavior seems to be growing more erratic--witness his recent mock-trial of President Bush as an "imperialist"--and he certainly conveys the impression of a leader who holds all the cards. The reality is more complex, though. Having chosen to gut the Venezuelan state oil company, PdVSA, when its workers went out on strike a couple of years ago, and with massive social and foreign-aid programs depending on funds diverted from PdVSA's reinvestment budget, Mr. Chavez must rely on the international oil companies that have invested in major heavy-oil upgrading projects in the country to produce enough oil to compensate for the post-strike decline of Venezuela's conventional production. In short, he needs these companies to fund his Bolivarian Revolution, as much as they need him for their future production growth and reserve replacement.

Despite this, Mr. Chavez appears capable of a retaliatory gesture that could greatly inconvenience US companies and complicate the US oil supply situation, even if it also harmed Venezuelan interests in the process. A Venezuelan embargo on oil sales to the US would have only a modest effect on world oil prices, because they would not take their oil off the larger international market. But replacement volumes for US Gulf Coast refiners would have to come from further away and would likely be a poorer fit for their refinery configurations, resulting in short-term product imbalances, outages and price spikes. So let's hope the current furor dies down quickly, rather than escalating.